Tuesday, August 29, 2017

Crude Oil - Post Harvey

Summary

The bottom of the recent trading range.Higher lows since late June.Processing spreads remain firm because of Harvey.Brent - WTI reflects fundamentals.Three reasons why crude oil could eventually surprise on the upside.

Hurricane
Harvey hit Corpus Christi last weekend as a Category 4 storm, and while
it quickly weakened, the weather event promises to continue dumping
rain on the Texas Panhandle for much of this week. The energy rich state
of Texas is always susceptible to a storm at this time of the year, but
Harvey was the biggest hurricane to hit the Texas coast in years and
the most ferocious in the United States since 2005.

As
the storm approached late last week, the price of crude oil did not
rally significantly even though the API and EIA reported inventory
withdrawals of 3.595 million and 3.33 million barrels respectively.
However, there are signs within the market structure of the petroleum
market that the downside is limited and there is upside potential in the
energy commodity for the coming weeks. The price of crude oil had
recovered from the lowest level since 2003 at $26.05 per barrel in
February 2016 to the $50 level on nearby NYMEX futures. Last November, a
production cut by OPEC made $50 a pivot point for the price of crude
oil. However, in June the price slipped to lows of $42.05 as shale
output from the United States continued to weigh on the fundamental
equation for oil, but it quickly recovered to the pivot price during the
summer months of 2017.

Most recently, crude oil has
declined to the bottom end of its short term trading range, and while
$50 is the top end, there are signs that oil could be heading higher
over the weeks ahead.

The bottom of the recent trading range

The
hurricane in Texas is causing refinery demand for raw crude oil in the
region affected by the storm to grind to a halt, and the price has
declined despite a weak dollar and rising industrial commodities prices.
Copper rose to a new high at $3.0870 on Monday, August 28, iron ore
remained over $75 per ton, and the Baltic Dry Index was just over the
1200 level. Even the price of lumber rebounded to over the $380 per
1,000 board feet level, but oil moved to the downside. Source: CQG

As the daily chart of nearby
October NYMEX crude oil futures highlights, the price put in a bearish
key reversal trading pattern on August 28 and was trading at the $46.60
level close to the lows of the session at $46.15 per barrel. Short-term
technical support for the energy commodity stands at $45.58 the July 24
lows. Meanwhile, the dollar index fell to a new low at 92.14 on the
September futures contract as the euro currency traded to just under the
1.20 level against the U.S. dollar. Almost all commodities posted gains
on Monday. Crude oil was the lonely loser in the asset class.

Higher lows since late June

The
price of October NYMEX oil futures will need to hold the $45.58 per
barrel level to keep the pattern of higher lows in place. Since the
$42.05 lows on June 21, oil has been making higher lows and reached a
high of $50.51 on October futures on the first day of August, and
technical resistance remains at that level.

While
the price action in the crude oil market has been bearish, there are
signs in the energy sector that the downside has become limited.
Products prices have rallied, and the premium for Brent crude has moved
to a multi-year high over recent sessions.

Processing spreads remain firm

Processing
or crack spreads exploded higher in the aftermath of Hurricane Harvey.
The storm in Texas has caused many refinery shutdowns, and the prices of
gasoline and heating oil futures have reacted by moving higher at a
time when the price of raw crude oil is going in the opposite direction.
While there is plenty of crude oil around, it is likely that
inventories of gasoline and distillates will decline dramatically as a
result of the storm and unprecedented flooding that followed. In
Houston, weather forecasters have projected that 30-50 inches of rain
will fall before the storm ends later this week. With crude oil moving
lower and products higher, crack spreads exploded higher on Monday,
August 28.

Source: CQG

As the daily chart of the
October gasoline processing spread shows, the price has moved to highs
of $20.58 on August 28 and was trading around the $20 per barrel level
at the end of the session.

Source: CQG

Meanwhile, the
price of the October heating oil crack spread which is a proxy for other
distillates like diesel and jet fuels has rallied to a high of $22.46
per barrel and was above the $22 per barrel level at the end of the day
on Monday.

The rise in the prices of oil products at
a time when raw crude oil was going the other way is the result of
refinery shut downs in Texas. However, as inventories of products will
certainly decline over the coming weeks, the demand for crude oil is
likely to rise when refineries come back on line shortly. Rising crack
spreads tend to translate to an eventual increase in demand for crude
oil.

Brent-WTI reflects fundamentals

Over recent weeks, we have seen the spread between Brent and West Texas Intermediate crude oil widen to a multi-year high.

Source: CQG

As the weekly chart
of Brent minus WTI crude oil shows, the premium for Brent rose to a
high of $5.62 on August 28. The last time the Brent premium was this
high was two years ago in August 2015. Brent has increased compared to
the NYMEX WTI crude oil because of a combination of OPEC production cuts
and increasing output from U.S. shale producers. At the same time, U.S.
inventories have been on the decline over recent weeks; both the API
and EIA reported declines of over three million barrels last week as of
the end of the week on August 11. Last Friday, Baker Hughes reported
that the number of rigs in operation dropped by five during the weeks
ending on August 18.

The Brent-WTI spread has
been reflecting the fundamentals of a drop in OPEC production and
increasing shale output. However, lower inventory numbers in the U.S.
and increasing demand for industrial raw materials from copper to steel
over recent weeks is a sign that China has been buying commodities. The
world’s most influential raw materials consumer is likely also
increasing their petroleum reserve, and that could be putting additional
upside pressure on the price of Brent crude oil. Brent is the benchmark
pricing mechanism for two-thirds of the world’s oil.

Three reasons why crude oil could surprise on the upside

The
knee jerk reaction of crude oil to the storm of epic proportions
hitting Texas was to move lower. However, there are some signs that the
selloff is currently creating a golden buying opportunity when it comes
to the energy commodity. Processing spreads have exploded higher as
refining has experienced interruptions. Brent has moved to a two-year
high against WTI crude oil. The moves in these spreads are not
necessarily bearish for the price of raw crude oil. There are currently
at least three reasons why I believe the price of crude oil is a scale
down buying opportunity at this time and the price could recover
dramatically to the upside over coming sessions.

First, the dollar is quickly approaching its critical technical support level at 91.88 on the dollar index futures contract.

Source: CQG

The weekly chart of
the dollar index illustrates that the greenback has declined to a low
of 92.13 on August 28 just 0.25 above the support level that could end
the bull market in the U.S. currency that began in May 2014. A weakening
dollar tends to support commodities price and crude oil is no
exception.

The second reason is that
while Hurricane Harvey initially supported product prices, 22% of
offshore oil is currently offline because of the storm. The Eagle Ford
Shale extends from South to South-west Texas and it is likely that there
will be production issues for many weeks to come because of the storm.
Manpower and other resources are likely to be limited as many workers
will be dealing with the aftermath of the storm. Additionally, on Monday
an oil rig broke away from its mooring in the Port of Corpus Christi
sinking a tug boat and causing the port to close. The storm’s initial
impact on refining caused product prices to explode higher but the
longer-term effects are likely to cause production to slow in the oil
rich state.

Finally, and perhaps most importantly,
other commodities prices are moving to the upside over recent sessions.
Copper, which tends to be a leader in the commodities sector, is trading
at the highest price since 2014. Crude oil hit its February 2016 lows
just one month after copper found a bottom at $1.9355 in January. Copper
is not the only raw material moving to the upside and it may not be
long before crude oil finds a bottom and begins to recover back to the
$50 per barrel level, or higher in the days and weeks ahead.

I
am a scale down buyer of crude oil on any further weakness in the
market. While Hurricane Harvey has initially caused the price of oil to
move to the downside, the medium-term effects of the storm could be very
bullish for the price of petroleum.

To profit from
commodities, you have to stay ahead of the trade. As a veteran
commodities market watcher, I’m uniquely qualified to help you do that.
My Marketplace service, the Hecht Commodity Report, offers a
comprehensive weekly outlook on over 30 individual commodities markets,
including U.S. futures. One of the most detailed commodities reports
available, The Hecht Commodity Report provides weekly up, down or
neutral calls on each market and highlights technical and fundamental
trends. I also make timely recommendations for risk positions in ETF and
ETN markets and commodity equities and related options. The Hecht Commodity Reportis a must-read if you want to profit in commodities, so subscribe today.

Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this
article myself, and it expresses my own opinions. I am not receiving
compensation for it (other than from Seeking Alpha). I have no business
relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author
always has positions in commodities markets in futures, options, ETF/ETN
products, and commodity equities. These long and short positions tend
to change on an intraday basis.

DONATE

"Would you consider a gift of $5 Dollars?"

We Use Cookies

This site uses cookies from Google to deliver its services, to personalize ads and to analyze traffic. Information about your use of this site is shared with Google. By using this site, you agree to its use of cookies.Learn MoreGot it

VISITORS

Copyright Disclaimer

Print Media/Music/Video selections:

RonDoids does not own the copyright to certain media posted within our site.

"Copyright Disclaimer Under Section 107 of the Copyright Act 1976, allowance is made for "fair use" for purposes such as criticism, comment, news reporting, teaching, scholarship, and research. Fair use is a use permitted by copyright statute that might otherwise be infringing. Non-profit, educational or personal use tips the balance in favor of fair use."